After years of warnings about peak oil, we don’t hear too much about that possibility anymore. The world is actually awash in fossil fuels and ongoing advances in exploration and exploitation means accessing reserves will be a continuing pursuit.
But the world also needs oil and natural gas. Although alternative fuel sources are growing, they cannot meet global energy demand. A new oil and gas boom is coming. Both the International Energy Agency (IEA) and OPEC forecast strong demand for fossil fuels. War in the Middle East may interrupt supply, too. That should keep a floor under prices if not elevate them.
Brent crude is almost $83 a barrel, up 12% from a December low while West Texas Intermediate is 14% at nearly $78 a barrel. And the potential for further demand from the Permian Basin continues to drive mergers and acquisitions. The most recent deal is Diamondback Energy (NASDAQ:FANG) acquiring privately-held Endeavor Energy for $26 billion. That is at least the fifth mega industry transaction in the last four months.
Here are three oil and gas stocks you will want to buy today ahead of the coming boom.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) is the largest integrated oil and gas giant and the first one you should buy now. It kicked off the M&A frenzy in October with its $59 billion acquisition of Pioneer Natural Resources (NYSE:PXD). The deal will make Exxon the largest producer of oil and gas in the Permian Basin, which produces 40% of all U.S. oil.
Although Exxon had offered commitments to renewable energy sources previously, the top oil and gas stock has chosen to focus on the resources in its wheelhouse. The oil company increased production volume from Guyana and the Permian Basin, both high-margin regions that contributed $1 billion to 2023 profits. Analysts expect those contributions to grow going forward.
Exxon offers investors a generous dividend that yields 3.7% annually. It has also raised the payout for 40 consecutive years. Exxon has committed to supporting the payment as one of only a few industry players that didn’t cut or suspend its dividend during the pandemic. It also capped capital spending at $22 billion to $27 billion through 2027. So long as oil prices remain about $40 a barrel, XOM stock should have no problem maintaining the dividend.
Chevron (CVX)
Runner-up is Chevron (CVX), the second-largest integrated oil and gas stock. It followed Exxon’s merger announcement with one of its own, a $53 billion offer for Hess (NYSE:HES). It also gives the oil stock some important assets in Guyana that will bolster its position in the future.
CVX stock assumes a large portion of Warren Buffett’s portfolio in Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B). After purchasing 16 million more shares of the oil company, Chevron is now Buffett’s fifth largest holding at 5.3% of the total. It is worth about $19 billion at today’s prices. The purchase reverses course for the billionaire, who had been a seller of Chevron stock for most of last year.
Chevron is also expected to keep growing. The oil and gas company has a large presence in the Permian Basin as well after its earlier acquisition of PDC Energy which helped it achieve record production in the region last year. It too remains focused on its oil and gas assets for long-term growth.
Chevron also pays a healthy dividend that was maintained during the pandemic that yields 4% annually.
Occidental Petroleum (OXY)
The third player you should be buying is Occidental Petroleum (NYSE:OXY), arguably Buffett’s favorite oil stock. It is the sixth largest position in Berkshire Hathaway and the investing guru has accumulated over 28% of the company’s stock. But with his shares valued at $15 billion, that’s only good enough for 4% of Buffett’s portfolio total.
Yet Occidental was also one of the companies getting in on the M&A action last year. In December the company announced it was paying $12 billion for Permian Basin driller CrownRock. The last major deal was Chesapeake Energy (NASDAQ:CHK) buying liquified natural gas producer Southwestern Energy (NYSE:SWN) for $12 billion. That was announced last month.
Buffett was already bullish about Occidental’s presence in the Permian Basin having said at the time of his original purchase that it was “a bet on the fact that the Permian Basin is what it is cracked up to be.” He bought more shares after the CrownRock announcement, suggesting he endorses the move.
There is an energy boom coming but it is not going to be in alternative fuels and renewables. It will be in fossil fuels and OXY stock will be a major beneficiary of it.
On the date of publication, Rich Duprey held a LONG position in XOM and CVX stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
